What made America great in the Gilded Age

“We were at our richest from 1870 to 1913. That’s when we were a tariff country,” said President Donald Trump recently, and he’s not wrong. But tariffs aren’t the whole story. The genius of the Gilded Age was interstate regulatory and tax competition. That economy boomed. From 1870 to 1913, America’s GDP grew at nearly 5 percent per year. Even though America’s population nearly tripled during that time, with 30 million immigrants, per capita GDP doubled. Steel production boomed, surpassing Britain, France, and Germany combined. Railway miles quadrupled. A period that began amid the ruins of civil war ended with America in first place among the world’s great economic powers. Washington collected lots of tariffs then, but little else. Before the 16th Amendment paved the way for federal income taxes in 1913, Congress was spending barely 1% of GDP — compared with nearly 25% today. Meanwhile, the federal power to regulate commerce was limited to transactions that actually crossed state lines, leaving the vast majority of regulation to the states.

States competed for capital and labor by keeping their taxes and regulations light and efficient. As a result, America became the world’s most competitive economy, attracting a flood of foreign capital and workers. It’s no surprise that the booming economy of the Gilded Age was able to sustain tariffs. Of course, that period had its dark sides — political corruption, “Robber Barons,” child labor, and environmental degradation. These excesses sparked the progressive movement. The sprawling administrative state created by President Woodrow Wilson was soon dictating prices for nearly every major commodity and service, leading to massive economic distortions. By the stock market crash of 1929, the economy was no longer competitive. A new round of tariffs — the Smoot Hawley Tariff Act of 1930 — devastated the economy, deepening the Great Depression. Franklin D. Roosevelt’s “New Deal” doubled down on progressivism, dramatically expanding the reach of the federal government. His court-packing scheme coerced the Supreme Court into dismantling the crucial constitutional limits on the federal power to regulate commerce, and the federal leviathan was born.

Progressives viewed interstate competition as a “race to the bottom” and held that it was the federal government ‘s role to stop it. What this meant in practice was protections from competition for every special-interest group that could hire lobbyists in Washington. Government became a system for wealth redistribution through subsidies, unfunded mandates, and government-created cartels — from the farm program to the National Labor Relations Act to socialized medicine. America’s private sector remains the world’s most innovative and productive, but a century of progressive policy has driven companies and jobs offshore. Such policies have proven particularly toxic in areas of low-skill labor, as attested by today’s Rust Belt towns, Appalachian communities, and inner cities.

Investment flows where taxes and regulations are low and production factors like labor and electricity are reliable and affordable. In all those metrics the U.S. is falling further and further behind much of the world. In the energy sector, heavily subsidized renewable energy is pushing America’s electricity rates toward European levels. America could soon be facing the same deindustrialization that Germany and Great Britain are facing today. Even in America’s most innovative sectors — like high technology — warning signs are everywhere. The entire supply chain for semiconductor manufacturing has moved offshore, with only high-end engineering remaining in the US China is already making inroads into these areas, and if America doesn’t act fast, it could soon start falling behind even in the high-tech race. Today, both parties are trapped in the maze of progressive government, a system that subordinates the public interest to special-interest groups seeking protection from competition — from the Jones Act to the sugar program. That is the real swamp, and escaping it will require thinking outside the box, with ideas such as Elon Musk’s Department of Government Efficiency. As President Donald Trump recognises, the US must become once again the world’s most attractive place to do business. Tariffs alone will not get us there. We must free America’s economy from the stifling burdens of progressive government and tax policy, and return to the interstate competition that made America great in the Gilded Age.